Van Eck: HOLDRs Exchange Set For Q4

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Van Eck Global, the New York-based money manager known for its natural resources strategies, filed regulatory paperwork saying the previously announced exchange of six exchange-traded HOLDRS securities into Market Vectors ETFs will take place in the fourth quarter.

Company officials, who declined to comment on how many of the existing HOLDRS investors might accept Van Eck’s exchange offer, first announced the plan on Aug. 12. The HOLDRS involved, which together have $3.30 billion in assets, will retain their existing trading symbols. The specific securities and their respective assets under management as of Sept. 29 are:

  • Oil Services HOLDRS (NYSEArca:OIH), $1.82 billion
  • Semiconductor HOLDRS (NYSEArca:SMH), $531.5 million
  • Pharmaceutical HOLDRS (NYSEArca:PPH), $492.3 million
  • Biotech HOLDRS (NYSEArca:BBH), $243 million
  • Retail HOLDRS (NYSEArca:RTH), $140.5 million
  • Regional Bank HOLDRS (NYSEArca:RKH), $72.0 million

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The plan is the latest sign that the ETF juggernaut is gathering steam. As of Thursday, Sept. 29, almost $1 trillion was allocated to various ETFs, with asset growth in recent years outpacing inflows into any other vehicle, as investors become more familiar with the benefits of the ETF structure.

HOLDRS, on the other hand, have had their day. The funds, which are holding company depositary receipts Merrill Lynch launched in the late 1990s and early 2000s, are narrowly focused portfolios that, once created, never changed. That set-and-forget aspect has made them increasingly irrelevant given that holdings of ETFs evolve with their respective indexes.

“One of the main advantages of ETFs over HOLDRS is that they allow the underlying constituents to change or be added over time,” Van Eck’s principal Jan van Eck said in a conference call, adding that an ETF basket also adds diversification to the exposure, not to mention tax benefits.

Still, as noted, the six HOLDRS involved have combined assets of $3.3 billion—a significant amount that could generate material profits for Van Eck should investors widely accept the exchange offer.

Taxes And Expense Ratios

Perhaps the most crucial piece of information Van Eck did reveal today in a conference call with journalists and on its website was the percentage of each of the involved portfolios that will have to be sold in the rebalancings that will occur in connection with the exchange offers.

The percentages of each of the HOLDRS holdings that will have to be sold—as of today—in the upcoming rebalancings are:

  • OIH, 28.21 percent
  • SMH, 43.43 percent
  • PPH, 52.6 percent
  • BBH, 63.51 percent
  • RCH, 26.11 percent
  • RKH, 76.17 percent

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Any capital gains associated with the sales of the stocks will have to be paid by shareholders, company officials said.

As previously disclosed, the company said the new ETFs will each have a 0.35 percent annual expense ratio. That works out to be more than what Merrill Lynch, the sponsor of the HOLDRS, has been charging, Van Eck officials said on the conference call. Those expense ratios will remain in place until at least May 1, 2013, they said.

Merrill said in a filing in August that the remaining 11 HOLDRS not involved in the Van Eck exchange are likely to be shut.

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Investor Choices

Investors will be able to choose whether to take the exchange offer or not, although Van Eck doesn’t anticipate many will bypass the transactions.

Still, if an investor takes no action at all, once the exchange offer expires and the HOLDRS Trusts are terminated, they might not have any way of selling receipts in any of these HOLDRS, and they will be subject to whatever language is in the original HOLDRS agreements.

In effect, the unclaimed underlying securities in the HOLDRS would likely be sold in what Van Eck called a “wind-down” period of four months from the termination date, and investors who did not switch to the ETF structure would face a taxable event.

“Investors have to affirmatively choose to take the offer,” van Eck said.

But an investor can also opt to sell the HOLDRS on the open market—less of a tax advantage than taking the ETF, Van Eck officials said.

They could even cancel the HOLDRS and receive the unbundled underlying shares they were invested in, Van Eck’s managing director Adam Phillips said in the phone call.

“Investors will not bear any fees, but may be subject to fees from intermediaries,” Phillips said.

Custodial fees may also apply if investors choose to cancel their participation in the HOLDRS, or they may need to pay brokerage fees if they do so through the secondary market, he added.

Van Eck stressed in a press release and in the call that investors should consult their financial and tax advisors.

But for the time being, no action is needed. Van Eck said it expects to provide further information on the exchange offer sometime in November.

Options In The Balance

Van Eck also said that the options market surrounding some of the HOLDRs was fairly liquid, a fact that could pose some challenges to those holding them.

“We believe the exchange offers may have implications for some HOLDRs options investors,” Phillips said in the call, adding that’s particularly true for those who hold options expiring after the exchange offers end.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: BBH , OIH , PPH , RKH , RTH

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